People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


Vol. XXXVIII

No. 10

March 09, 2014

 

Moily, Kejriwal and the Scam in Gas Pricing

 

Prabir Purkayastha

 

RELIANCE and the near doubling of the gas price led to Kejriwal's short-lived government filing an FIR against Moily, the petroleum minister and Mukesh Ambani, the chairman of Reliance Industries Limited. The scam in gas pricing is of course not a Kejriwal or AAP discovery; Left MP's – Tapan Sen and Gurudas Dasgupta and earlier, late Dipankar Mukherjee – have exposed the successive scams in gas pricing that have helped Reliance to loot the people.

 

To understand the dimension of these scams, let us look at the current scam. The price of gas has been raised from $4.2 per million BTU (MBTU) set earlier to $8.00 now. Just for the five-year period that the gas price has been fixed, the additional subsidy on account of fertilisers and power generation would be Rs 1,80,000 crores, the consumers would have to pay double the current price per cylinder of cooking gas; on the other hand, the additional profit to Reliance will be of the order of Rs 100,000 crores. A classic case of robbing the poor to pay the rich. Mukesh Ambani is one of the richest men in the world and Reliance is sitting on a huge cash reserve right now while the country is cash strapped. 

 

The gas price was fixed in 2007 at $4.2 per MBTU by an Empowered Group of Ministers (EGOM). This itself was a huge bonanza to Mukesh Ambani owned Reliance Industries Limited. Reliance had stated in court (in the court battle between the two Ambani brothers over gas supplies) that the cost of production from KG Basin was around $ 1 per MBTU. In other words, the government had fixed the price of gas at more than four times the cost of production of Reliance gas!

 

Earlier, Reliance had quoted a price of $2.34 to NTPC for a 17-year period. Even if Reliance had supplied gas to NTPC at their quoted price, they stood to make a considerable profit. Once the price of gas was fixed by the government at $4.2, Reliance claimed that they could supply to NTPC only at the government fixed price and reneged on their contract. In other words, they had to make huge profits as the government forced them to sell their gas at a higher price!

 

At the revised price of $4.2, under the profit sharing scheme with government of India for KG Basin D6 gas-field, a large share of profits would have also accrued to the government. To avoid this, Reliance took the simple route of gold-plating its capital costs in the KG D6 gas field – it claimed that it would double its production by this added investment. In actual practice, the gas yield dropped drastically even though the capital costs went up by four times! The CAG submitted a scathing report on the actions of both the petroleum ministry and Reliance in this huge increase in the cost of developing the field. The government has yet to take any meaningful action on the CAG report.

 

DOUBLING OF PRICE

HAS NO JUSTIFICATION

The near doubling of gas price from the already exorbitant $4.2 to the new high of $8 MBTU in the first year (2014), (subsequently set to go up by 20% every successive year), is not justified on any count. The Rangarajan Committee that went into gas pricing fixed the gas price – not based on the cost of production – but on some arbitrary formulae on market prices from Japan, Europe, the US, etc. The Reliance argument – repeated by Moily – that the cost of production is so high that we need a much higher selling price was never examined by either the Rangarajan Committee or by the petroleum ministry. So when Moily claims that the cost of production in off-shore oil/gas fields needs a higher price, he is speaking off the top of his head. He has not produced an iota of proof to substantiate this claim.

 

Just for comparison, let us take gas prices in other countries. The Henry Hub terminal has a spot price for gas. It was hovering below $ 3 per MBTU for most of 2013, when all this price fixation was going on. This was below even the $4.2 per MBTU price of gas fixed 4 years before. In China, the gas price has been fixed recently at $4.7, again well below what Moily has fixed for India.

 

Why should the price given to any gas producer in India be linked to the market price of gas elsewhere or be priced in dollars? After all, this gas is underground in Indian territory and does not change in any way with the rise or fall of the rupee. If gas production needs costly raw materials, one can understand then its link to the market. This is also not the case – the prospecting and developing the gas fields are one time investments. So why should Indian gas be priced based on market prices elsewhere?

 

The current price of gas fixed by the government is based on the Rangarajan Committee's report. The Rangarajan committee suggested that Indian gas prices be pegged to a 12-month average of the price of LNG imports to India and the prices prevailing in the US, Europe and Japan. Why should gas produced in India be pegged to the market price of imported gas or to gas prices in Japan and Europe who import all their gas? No logic has ever been given for this. After all, gas found in India or in India's economic zone in the seas is Indian peoples' property. If we give a license to a private or a public sector company to develop such gas fields, yes their costs including reasonable profits should be compensated. But why should they make wind-fall profits merely because the international price of gas rises in Japan? Or in Europe? In what way is the price of gas in the international market linked to the cost of producing gas in India?

 

The answer to this is purely ideological – it is the belief of successive governments that all prices should be determined by the market. This is not based on anything other than a near religious belief in the markets. That is why when the gas contracts were signed, the price of gas was supposed to be determined by a market mechanism, which would then constitute the basis of gas pricing. Since no such mechanism exists – gas is bought and sold in a restricted market where the administered prices  are in use – therefore the decision to link it with prices in Japan, LNG landed price in India, European prices, etc.

 

The other argument of Moily that unless we give import parity to Indian gas producers, there will be no investment in Indian gas fields, is again empirically wrong. We have given import parity to oil producers for the last 10 years; it has produced no rush of foreign investments either in prospecting or developing Indian oil fields.

 

The third argument that Moily has produced is even more absurd than his other two arguments. He claims that unless we double the internal price of gas, we will have to pay a higher price for imported gas than for indigenous gas. Somehow, he believes that paying a higher price to Ambani also would make the Indian people feel better. We import gas because we have a shortfall of gas. Why would hiking the price of indigenous gas to imported levels help either the Indian consumer or the Indian government? A number of gas fired power plants are lying idle or unable to produce at full load precisely because of high price of imported gas. If all indigenous gas is also priced at this level, it is bidding goodbye to 28,000 MW of gas-based power plants. Or adding to power subsidies.

 

MARKET FUNDAMENTALISM

IS THE PROBLEM

We may be misjudging Moily. May be his argument is that Reliance would produce more from its gas fields if the price is raised and not otherwise. Many people have charged Reliance with deliberately withholding production in order to blackmail the government. Is that what Moily is saying – that since Reliance is blackmailing us and cutting back on production, we are forced to import additional gas and pay in dollars. Why not then give the increase to Reliance in rupees instead of giving it in dollars to these pesky foreign suppliers? In other words being blackmailed by Reliance is preferable to paying foreign suppliers in foreign exchange.

 

This brings us to the other question, what should the government do when it is blackmailed by suppliers withholding supplies? The answer is a simple one – take over the blackmailing companies. This is what any government with any self-respect should do, instead of caving into blackmail. This is what the government should have done also with Tata and Adani, who withheld supplying electricity from their Mundra plants. Instead, we have succumbed to their blackmail also and promised them an increase in prices from the contracted price. Even though such post facto modification of the contract is illegal.

 

The interesting sideline on gas pricing is the studied silence of BJP and its prime ministerial candidate Narendra Modi. The BJP’s economic policy has always been that they will provide not an alternative but only a cleaner version of Congress policies. This is of course in the belief that people have short memories and will not remember the BJP Raj where VSNL, IPCL and Centaur had been sold at throw-away prices, and the major telecom scams were seeded. Nor will people look at the Karnataka mining scam which has cost the country about Rs 100,000 crores. Or Modi's record in Gujarat – where the Modi government gave away 10% shares in a KG basin block holding trillions of dollars of gas to a six-day old company formed with $64 equity capital incorporated in Barbados. Subsequently, this contract had to be cancelled under public pressure. Not surprisingly, Yeddyurappa is now back in the BJP fold.

 

The key issue is how to price our natural resources. This is what we need to discuss. It is here that both the major parties – BJP and the Congress have a unity of views. Both believe that markets should rule. What we have seen from the AAP – its decision to file an FIR against Moily aside – is not any different. Kejriwal has also talked about the sanctity of the markets. If we take market pricing as our logic, scams are inevitable as in a whole range of commodities, there are no markets. This is true for power, this is true for gas and it is true for telecom as well. It is market fundamentalism that is the problem. And here, the Congress, the BJP and the AAP do not appear any different.